Bid shopping is a practice in which a contractor discloses the bid price of one subcontractor to another in an attempt to obtain a lower bid price. A related type of bid shopping is “bid peddling,” in which the subcontractors offer to beat the known bid of another subcontractor. Bid shopping can occur both before and after the project owner awards the prime contract to the general contractor.
As electrical estimators, most of us consider bid shopping to be an unfair way for owners and general contractors to get us to lower our price. However, many estimators participate in bid shopping, as it is often perceived to be the only way to get a project. Some also engage in bid shopping with their vendors.
While researching this article, I ran across a troubling definition. According to Webster’s New World Law Dictionary, bid shopping is defined as “The legitimate practice whereby a general contractor, after being awarded a contract, tries to reduce his own costs by disclosing to interested subcontractors the lowest bids he received for subcontracts, and then inviting even lower bids”. I was very surprised by the word legitimate in this definition, as I believe bid shopping is dishonest and unethical.
According to James Gill, Jr., a lawyer and professor of construction law and ethics at Louisiana State University in Baton Rouge, the ethics of bid shopping ultimately lies in the eyes of the beholder — what subcontractors consider unethical might not be questionable to an owner. My observations have led me to believe that like most issues, the ethics of bid shopping are driven by money. In my wanderings around the internet and my personal experience, I find that general contractors tend to be in favor of bid shopping, while subcontractors are mostly against it. General contractors profit from bid shopping, while subcontractors lose profits.
Gill goes on to say, “If you are an owner and you want to get of the best price for your (new) house, for example, what do you do? You call four or five different contractors while you are shopping. (The subcontractor’s)Suppliers expect you to shop around, but subcontractors don’t want you to take their price and tell it to somebody else.” Of course we don’t. These estimates can cost thousands of dollars to prepare. Do I want to spend money on an estimate that is just going to be handed to my competitor?
One of my customers told me a story about feeding a number far below cost to a general that was known to shop his numbers. The general got the job with the sub he shopped the price to. After the sub lost money on the project, had had the nerve to call my customer and ask him if he could really do the job for that price. My customer asked him how he knew what his price was. End of conversation.
There are consequences to be considered by those who engage in bid shopping. One consequence is a loss of trust between the electrical contractor and the general contractor. By keeping and analyzing bidding records, it is fairly easy to find out who is shopping your bids. Once a subcontractor discovers who is shopping his numbers, he can either raise his numbers to that contractor, or stop bidding to him altogether.
Another consequence stems from the fact that bid shopping encourages subcontractors to accept contracts for projects that are less than their actual cost. The owner will suffer additional costs from the sub contractor’s efforts to make a profit. Quality issues, substitutions, schedule difficulties and inflated change orders are a few of the additional costs that can be passed on to an owner.
In an effort to prevent generals from shopping their bids, many subcontractors submit their bids to the contractor just minutes before the bid deadline. They do this hoping that the contractor won’t have time to shop their bids to other subcontractors. The consequence here is that the contractor may be unable to deal with scope issues, errors, exclusions and qualifications. The result of this is can be mistakes in the contractor’s bid which can lead to many problems during the execution of the contract.
It has been a struggled to keep this article short, as the discussion about bid shopping seems to be un-ending. I will continue this subject in my next post.